E How Government Causes Inflation -

E How Government Causes Inflation

Oct 25, 2018Jeremy ParkinsonFinance0

We know that inflation is the debasement of money by government. The effects of inflation show up in the form of rising prices over time. The rising prices are a reflection of the loss of purchasing power of the currency involved. For our purposes, that means the U.S. dollar.

The chart below depicts increases in the Consumer Price Index, year-to-year, dating back to 1914…

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The green columns indicate years during which the prices of goods and services – as represented by the CPI – increased. This is “a reflection of the loss of purchasing power” of the U.S. dollar.

The red columns indicate years during which the prices of goods and services declined. The falling prices in those years are “a reflection of the increase in purchasing power of the U.S. dollar”.

The overwhelming predominance of green years vs red years (red years of significance are 1921-22, 1926-28 1930-32, 1938) indicates an ongoing, long-term decline in the value of the U.S. dollar – over many decades. However, the extent of the decline is easily underestimated.

The effects are cumulative. And when one learns that the U.S. dollar has lost ninety-eight percent of its purchasing power over the course of the period depicted in the chart above, the gravity of the situation is worsened considerably.

How does the government “cause”, or create, inflation?

The term government includes central banks. The U.S. Treasury, in conjunction with the Federal Reserve, continually expands the supply of money and credit by issuing Treasury Bonds, Notes, and Bills.

The Federal Reserve receives the newly certified Treasury securities and then issues a credit to the U.S. Treasury reflecting the amount of the Treasury Securities which are now on deposit with the Fed.

The U.S. Treasury proceeds to spend the new funds which it has received from the Federal Reserve, and the Fed subsequently places the Treasury securities with certain primary dealers, who, in turn, offer them to investors. The investors include foreign governments, large corporations, and private individuals.